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What are we looking for?

Profitable picks amongst gold stocks in Canada.

The screen

Last Thursday's Brexit vote certainly caused a stir across the globe, particularly in the foreign-exchange markets. During times of forex volatility, the "flight to safety" instinct kicks in for many, boosting up the price of gold. This may provide Canadian equity investors to latch on to some short-term gains in this sector. To find a suitable set of profitable gold stocks, I've ranked the sector based on the best combination of the following metrics:

  • Latest reported return on equity, and the average return on equity over the last three years (recall ROE is a profitability metric that takes the latest estimated earnings per share and divides by the book value of equity – higher figures preferred);
  • Latest reported return on total assets (similar to ROE, but divides EPS by total assets – higher figures preferred);
  • Quarterly earnings momentum (the latest four quarters of reported earnings versus the same figure one quarter ago);
  • Earnings variability (a proprietary score that measures how volatile a company’s reported earnings are. Companies with consistent reported numbers will have a lower score and are preferred);
  • Market capitalization (here larger companies are preferred).

Only gold stocks were considered in this analysis. At present, there are 72 gold companies in the Morningstar CPMS Canadian database. In addition, stocks with a debt-to-equity ratio greater than 0.35 were excluded from this screen to avoid overly leveraged companies.

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used CPMS to back-test the strategy from December, 1990, to May, 2016. During this process, 10 stocks were purchased and equally weighted. Stocks would be sold if they fell outside the top 25 per cent of the ranked universe. Over this period, the strategy produced an annualized total return of 13.0 per cent while the S&P/TSX materials total return index advanced 4.9 per cent. The 10 stocks that qualify today are listed in the accompanying table.

As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here. Although this is a gold-specific strategy, it is always recommended to ensure that your equity portfolio remains diversified across multiple economic sectors to reduce volatility.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

Profitable Canadian gold stocks

RankCompanySymbolMarket Cap ($ mil. CAD)Trailing ROE (%)3Y Avg ROE (%)Trailing Rtn on Total Assets (%)Qtly Earnings Momentum (%)Earnings Variability ScoreDebt to Equity RatioDiv. Yield (%)
1Goldcorp Inc.G-T19,906.80.212.540.1552.1012.590.210.43
2Royal Gold Inc.RGL-T5,838.82.752.922.065.2911.670.281.33
3Detour Gold Corp.DGC-T5,689.5-1.25-3.79-0.9658.5314.900.240
4Newmarket Gold Inc.NMI-T668.124.4413.6118.63-22.8015.9600
5B2Gold Corp.BTO-T2,944.11.542.651.0213.0513.750.310
6GoGold Resources Inc.GGD-T196.52.18n/a1.708.8510.0000
7Centamin plcCEE-T2,488.67.6014.677.334.4516.3701.75
8Semafo Inc.SMF-T2,091.88.465.066.3734.6017.930.090
9Franco-Nevada Corp.FNV-T16,865.92.734.052.5010.0216.2801.2
10Richmont Mines Inc.RIC-T739.58.483.066.3034.9521.120.050

Source: Morningstar Canada

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